I often say, just because it can be done, doesn’t mean it should be done – and doing your feasibility numbers is a big part of making the decision about whether to go ahead or not.
But what if I were to tell you that one of the biggest mistakes I see in feasibilities (and I see a lot!) is hiding in plain sight?
Do you want to take a guess at what the biggest hidden cost is….?
Now, if you went for something in the general category of taxes, that’s a good start – land tax, GST and Council contributions, to name a few, are often overlooked by developers. But they’re not top of the list.
Give up yet? Okay, I’ll tell you – the number one hidden cost of development is….
Poor site assessment. Surprise!
“Hang on a second,” I can hear you saying. “That’s not a cost, that’s just an activity you need to do.”
Let me explain….
The reasons site assessment is the biggest cost hiding in plain sight is because beginner Property Developers just don’t see the problems on the site, and therefore don’t put aside money to fix them.
Let’s take a look at some of the big ones.
Slope
With the right design and Builder, you can build on almost any slope, except for perhaps a sheer cliff face. And even that’s possible with cantilevering! The problem is, a lot of Property Developers use “rule of thumb” numbers when they’re working out a feasibility. So they’ve been told it will cost a certain number of dollars per square metre to build a dwelling, and based on the size of the lot they have a pretty good idea how big the dwellings are going to be, they do the maths and hey presto! A build cost to put in the feasibility spreadsheet.
But although this is fine on flat blocks, add in slope, particularly a substantial slope, and you’ve just added a whole can of worms to the equation. It affects the footings and the engineering behind them. Extra materials may be needed for bigger stumps, there could be extra costs getting materials on site, or removing debris. While some of these may be covered by contingencies, on some projects the slope can add substantially to the final bill, and this is often either overlooked or underestimated at the feasibility stage.
Services
If you follow my process, then you’ll have checked out the location of services at the due diligence stage. Sometimes, though, the reality of what’s required to install them is a lot more expensive than you may have anticipated. This is particularly true when you add the previous category – slope – into the equation. Slope affects any digging required on site to run services, and can become a nightmare if the slope doesn’t run the right way for connecting the services.
If accessing the services means digging up the road, that’s an extra cost, both in terms of the works required as well as extras such as traffic control.
Other things to allow for include any situation where you’re going to need to access services via a neighbouring property. While it would be nice to think your neighbour will be friendly and amenable to you digging up their property, that’s not always the case. And the dollars required to help them change their mind may end up being substantial.
Earthworks
Starting with a flat, clean site can be surprisingly expensive. You might also need to complete extra earthworks onsite during the building process, which adds to your costs. One example is retaining walls. They look simple enough, but depending on how high and complicated they are, can add up to quite a substantial cost.
Trees
Almost any Developer with a few runs on the board will have their own favourite tree story. The truth is, even if you have Council permission to remove a tree, it’s not cheap to remove them if they’re large. So get quotes and put the costs into your feasibility.
Footpaths and Crossovers
Depending on the contract you have with your Builders, paths and driveways on site may be included, or you may need to price them separately.
But have you thought about the footpath out the front of the property? Or the need to add a new crossover, or perhaps replace an existing one to match current requirements?
Councils love to have Property Developers upgrade anything that’s getting a bit old or cracked, because then they don’t have to pay for it themselves. Make sure you spend time determining the current condition of these Council assets, and allow for their replacement if there’s a chance Council will get you to foot the bill for an upgrade.
Power Poles
I could probably write a whole blog post on all the ‘ins and outs’ of power poles and developments. I’ll keep it simple though – relocating them is not cheap. And in many areas, the second you do anything at all involving power, you’ll be required to run everything underground. So make sure you check your Council's requirements and factor this into your feasibility.
So…”What else?” I hear you ask...
All the previous hidden costs come under the “hiding in plain sight” category as once you’ve been on site and walked around as part of your due diligence, you should have an awareness of the potential problems, and taken the time to cost out likely solutions. Next up...
Transaction & Project Costs
Earlier I mentioned assorted taxes that don’t always make it into a feasibility, but there are MANY other costs as well. These include:
Important to note also that some of these costs can seriously eat up a good chunk of profit if a project drags out well past the expected completion date.
So there you have it – the biggest hidden costs in property development are hiding in plain sight. Which means the best way to find them and allow for them is to use your eyes on site and see how many you can find. It’s not the problems of a site that stop a deal from being profitable, it’s the fact you didn’t see them in the first place, so failed to allow for the costs of fixing them.
Remember - you don't lose money on a deal you throw away, so always assess a site with a view to saying “Next!”
But what if I were to tell you that one of the biggest mistakes I see in feasibilities (and I see a lot!) is hiding in plain sight?
Do you want to take a guess at what the biggest hidden cost is….?
Now, if you went for something in the general category of taxes, that’s a good start – land tax, GST and Council contributions, to name a few, are often overlooked by developers. But they’re not top of the list.
Give up yet? Okay, I’ll tell you – the number one hidden cost of development is….
Poor site assessment. Surprise!
“Hang on a second,” I can hear you saying. “That’s not a cost, that’s just an activity you need to do.”
Let me explain….
The reasons site assessment is the biggest cost hiding in plain sight is because beginner Property Developers just don’t see the problems on the site, and therefore don’t put aside money to fix them.
Let’s take a look at some of the big ones.
SlopeWith the right design and Builder, you can build on almost any slope, except for perhaps a sheer cliff face. And even that’s possible with cantilevering! The problem is, a lot of Property Developers use “rule of thumb” numbers when they’re working out a feasibility. So they’ve been told it will cost a certain number of dollars per square metre to build a dwelling, and based on the size of the lot they have a pretty good idea how big the dwellings are going to be, they do the maths and hey presto! A build cost to put in the feasibility spreadsheet.
But although this is fine on flat blocks, add in slope, particularly a substantial slope, and you’ve just added a whole can of worms to the equation. It affects the footings and the engineering behind them. Extra materials may be needed for bigger stumps, there could be extra costs getting materials on site, or removing debris. While some of these may be covered by contingencies, on some projects the slope can add substantially to the final bill, and this is often either overlooked or underestimated at the feasibility stage.
Services
If you follow my process, then you’ll have checked out the location of services at the due diligence stage. Sometimes, though, the reality of what’s required to install them is a lot more expensive than you may have anticipated. This is particularly true when you add the previous category – slope – into the equation. Slope affects any digging required on site to run services, and can become a nightmare if the slope doesn’t run the right way for connecting the services.
If accessing the services means digging up the road, that’s an extra cost, both in terms of the works required as well as extras such as traffic control.
Other things to allow for include any situation where you’re going to need to access services via a neighbouring property. While it would be nice to think your neighbour will be friendly and amenable to you digging up their property, that’s not always the case. And the dollars required to help them change their mind may end up being substantial.
EarthworksStarting with a flat, clean site can be surprisingly expensive. You might also need to complete extra earthworks onsite during the building process, which adds to your costs. One example is retaining walls. They look simple enough, but depending on how high and complicated they are, can add up to quite a substantial cost.
Trees
Almost any Developer with a few runs on the board will have their own favourite tree story. The truth is, even if you have Council permission to remove a tree, it’s not cheap to remove them if they’re large. So get quotes and put the costs into your feasibility.
Footpaths and Crossovers
Depending on the contract you have with your Builders, paths and driveways on site may be included, or you may need to price them separately.
But have you thought about the footpath out the front of the property? Or the need to add a new crossover, or perhaps replace an existing one to match current requirements?
Councils love to have Property Developers upgrade anything that’s getting a bit old or cracked, because then they don’t have to pay for it themselves. Make sure you spend time determining the current condition of these Council assets, and allow for their replacement if there’s a chance Council will get you to foot the bill for an upgrade.
Power Poles
I could probably write a whole blog post on all the ‘ins and outs’ of power poles and developments. I’ll keep it simple though – relocating them is not cheap. And in many areas, the second you do anything at all involving power, you’ll be required to run everything underground. So make sure you check your Council's requirements and factor this into your feasibility.
So…”What else?” I hear you ask...
All the previous hidden costs come under the “hiding in plain sight” category as once you’ve been on site and walked around as part of your due diligence, you should have an awareness of the potential problems, and taken the time to cost out likely solutions. Next up...
Transaction & Project Costs
Earlier I mentioned assorted taxes that don’t always make it into a feasibility, but there are MANY other costs as well. These include:
- Agent costs (both buying and selling)
- Legal searches
- Council rates, water rates
- Legal Fees
- Loan application fees
- Insurance
- Loan Interest
Important to note also that some of these costs can seriously eat up a good chunk of profit if a project drags out well past the expected completion date.
So there you have it – the biggest hidden costs in property development are hiding in plain sight. Which means the best way to find them and allow for them is to use your eyes on site and see how many you can find. It’s not the problems of a site that stop a deal from being profitable, it’s the fact you didn’t see them in the first place, so failed to allow for the costs of fixing them.
Remember - you don't lose money on a deal you throw away, so always assess a site with a view to saying “Next!”
